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Lecture 2 – Audit Regulation, Structure of the Profession and Auditor’s LiabilityWhen Auditor doesn’t perform correctlyAUDITOR’S LIABILITYAuditors are exposed to legal liability in 3 ways:1)Contract law – sue on the terms 2)Corporations Act 3)Tort of Negligence – duty of care to 3rdparties Reasonable Care and Skill:An Auditor has a duty to exercise the reasonable care and skill expected of a professional auditor Requires adherence to regulatory and professional standards in all aspects of an audit. ‘The professional man owes a duty to exercise that standard of skill and care appropriate to his professional status’ (Caparo, 1990).Negligence:Negligence: any conduct that is “careless or unintentional in nature and entails a breach of any contractual duty or duty of care in tort owed to another person/s”.Donoghue v Stephens An Auditor would be deemed to have been “negligent” where they made a judgement or error that a normal, reasonable Auditor would not have made in the same situation.Claims for Negligence:To be successful in a claim for negligence, a plaintiff must prove that:1)A Duty of Care was owed to the plaintiff by the defendant – relationship of Proximity (direct relationship)-Client (BoD or entire shareholders) & Auditor: DOC through the engagement letter (contract) -3rdparties: (individual shareholder still a 3rdparty) Proximity only through – a Privity letter/contract 2)There was a breach of the duty of care as the Auditor did something a reasonable Auditor would not have done 3)It resulted in an inappropriate Audit report which was relied upon by the plaintiff 4)Financial Loss or damage was suffered by the plaintiff as a result -Causation – flow on effect; due to the Auditor’s negligence this happened Note: A causal relationship existed between the breach of duty and the harm suffered by theplaintiff.Liability to Clients:Liability to clients arises both in Contract and under the Tort of Negligence (3rdparties – shareholders, creditors) Key cases include: London & General Bank Ltd (1895) – owe 3rdparties DOCKingston Cotton Mill (1896) – Auditor is a watchdog Thomas Gerrard & Son (1967) Pacific Acceptance (1970) – codified what Auditors must do
Kirby v Centro Properties (2012) – Auditor must use all information that became available to them Pacific Acceptance (1970):Auditors’ duties and responsibilities are to:Substantiate and very claims from management Use reasonable care and skill Check and see for themselves – don’t trust client Audit the whole yearAppropriately supervise and review work of inexperienced staff – ASA 220Properly document procedures – ASA 230 Rely on satisfactory internal controlsWarn and inform the appropriate level of managementTake further action where suspicion is aroused – ASA 240; Kingston Cotton MillStructure plans and procedures so that discovery of material error or fraud is reasonably expected Be guided by professional standards – ASAs Corps Act Contributory Negligence: